Measuring What Matters

Confucius once said, “We are so busy doing the urgent that we don’t have time to do the important.” I haven’t been able to get that comment out of my mind as I watch the “Fiscal Cliff” shenanigans. Our faltering economy has been a central concern for the last several years. But the focus of that concern has been on the urgent, the short-term, the cliff a few feet away, with no serious attention paid to the very important fact that there are fundamental flaws in the underpinnings of our economic system. If we don’t address them we will face these urgent, volatile, short term crises over and over again, with more and more painful consequences.

Two of the biggest flaws in the status quo economic system are that we use incomplete accounting tools and measure the wrong things. The primary tool we use to assess the health of the economy is the Gross Domestic Product (GDP). If the GDP is going up the economy is seen to be doing well. If the GDP is going down the economy is seen to be unhealthy. But here’s the problem. The only thing GDP measures is how many dollars are flowing through the system; not whether those dollars are making us healthier, happier or more secure.

According to the GDP, the money spent to keep a child in the foster care system or jail registers as just as positive as the money spent to help stabilize a family so that the child can stay at home.

The funeral costs for the victims of mass shootings boost the GDP. So does the flurry of gun purchases as people react to growing fear and insecurity. The GDP registers both of those things as an economic gain. Nowhere does it account for the human capital – the potential and talent and social connections – that was lost.

We’ve been growing the GDP for decades but, more Americans are in poverty today than at any point since the Great Depression. The gap between our wealthiest citizens and the poor has never been greater.

And our environment is being severely damaged. The most comprehensive scientific assessment available reports that two-thirds of the world’s ecosystem services are in serious decline. Humanity is now using up natural resources 35% faster than those resources can regenerate.

A disturbing story in the Wall Street Journal on June 15, 2010 suggested that the Deepwater Horizon oil spill might actually benefit the economy. The article noted the loss of thousands of jobs in the fishing and tourism sectors but predicted that this would be offset by the high costs of the clean-up and that the likely net impact on the U.S. economy would be positive.

Economists and lawmakers argue that seriously curbing carbon emissions would reduce the GDP thereby damaging the economy. Yet they do not factor in the costs of increasingly intense hurricanes and flooding events or the ruination of fisheries as a result of oil spills.

As things stand now, our economy is judged to be functioning at its peak when it is wreaking maximum damage on our environment. The money spent to clean up an oil spill in Alaska, the Gulf Coast, or Oregon counts as a positive, while the decimation of the environment, our natural capital, doesn’t factor into the equation at all.

In 1968 Robert Kennedy said:

“The gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile”.

The GDP was developed in the 1930s by economists Simon Kuznets in the U.S., and Richard Stone in the U.K.. The Bretton Woods gathering of 1944 established the World Bank, The International Monetary Fund and enshrined GDP as the global measure of progress. This was an important achievement at the time as it gave economists and policy-makers a tool for assessing trends and comparing economic status between countries. And yet, even founder Simon Kuznets warned that this metric was not sufficient to measure the progress of a nation. In 1934, in his very first report to the U.S. Congress, Kuznets said that the welfare of a nation could not be inferred from a measure of national income.

It is important to note that the GDP was established under some basic assumptions that made sense at the time but are now known to be false. In the mid-1940s economists did not consider that nature’s capacity to support human activities may have limits. Scientists did not know that human activity could alter the climate of the planet.

Today we do know that human activities are damaging our environment. And we know that the gap between the rich and the poor has never been so large. Our current economic system is impoverishing the planet and millions of our fellow human beings.

Business people know we tend to manage what we measure. The primary problem with using the GDP metric is that we are managing for constant economic growth, without measuring the true costs of that growth. In 1962 Kuznets warned, “Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.” Growth and development are not synonymous. Growth is about getting bigger while development is about getting better. With GDP we are managing only for quantity not quality.

In order to create an economy that makes our lives better, improves our health and gives our kids a shot at inheriting a rich and abundant world we need to measure what really matters and develop an accounting system that assesses natural capital and human capital along with fiscal capital.

The good news is there is a lot of momentum toward meeting this challenge. First, this Great Recession has opened an unprecedented opportunity. It has laid bare serious flaws in the structure of our economic system. Cities and counties are teetering on bankruptcy. Nations are deeply indebted. For the first time in America’s history it is unlikely that younger generations will be as well as off as their parents. As a result more and more people are recognizing the need for a course correction.

The Triple Bottom Line measures business or organizational success in the economic, ecological and social spheres. First articulated in 1981, it continues to gain traction with corporations, local through state governments and the United Nations.

At least four U.S. states are working on developing Genuine Progress Indicator (GPI) metrics as an approach to full-cost accounting. Last summer I joined representatives from Maryland, Vermont, Utah, and Oregon to share early experiences applying the GPI at the state level. The organization Demos is supporting this work and will convene a follow up gathering in early 2013 that will include several additional states that are now working on triple bottom line metrics.

French President Nicolas Sarkozy commissioned a 2009 study on alternatives to GDP in 2009. UK Prime Minister David Cameron recently unleashed plans to measure national well-being. And the small Himalayan nation of Bhutan has already moved beyond GDP and now bases policy decisions on Gross National Happiness (GNH).

As part of a project called Beyond GDP the German government is paying for thought leaders and triple bottom line practitioners to gather in several intensive sessions to take the next steps in catalyzing the evolution to more comprehensive measurements of economic development and well-being. I am excited to be part of this project and will be reporting as these developments move forward.

It is clear that we need to develop an economy that is more durable, resilient and sustainable over the long haul. This is a doable challenge. It is important to remember that the economy is not a natural wonder or an act of God. It is a human-made construct. We invented it and that means we can reinvent it.

I will end as I began with a quote from Confucius. “The man who says he can, and the man who says he cannot, are both correct.”